E-Paper
Retail inflation eases slightly to 7.01% in Jun
India’s inflation problem seems to have bottomed out sooner than the Monetary Policy Committee (MPC) of the Reserve Bank of India thought as the benchmark inflation rate, as measured by Consumer Price Index (CPI), eased for the second consecutive month to 7.01% in June.
India’s inflation problem seems to have bottomed out sooner than the Monetary Policy Committee (MPC) of the Reserve Bank of India thought as the benchmark inflation rate, as measured by Consumer Price Index (CPI), eased for the second consecutive month to 7.01% in June.
This leaves the June quarter inflation rate at 7.28%, 22 basis points less than what MPC projected in its resolution on June 8. The MPC projection came on the back of a 7.8% CPI reading in the month of April.
When read with latest data on industrial production, an argument could be made that there is a case for supporting growth rather than putting all policy eggs in the inflation control basket. The Index of Industrial Production (IIP) data showed a more than healthy annual growth of 19.6% in May — but this was more a reflection of a favourable base effect due to the disruption from the second wave of Covid-19 which peaked on May 9, 2021. When compared to pre-pandemic (May 2019) data, IIP growth in May 2022 was just 1.7%.
Finance minister Nirmala Sitharaman reiterated that the government will continue to stay vigilant on price pressures and will not be averse to using tools outside the realm of monetary policy should that be needed. “I see monsoon being favourable to agriculture. Production will be good and rural demand will remain intact. As RBI has estimated, till the start of the second half of the year, both RBI and government will have to be mindful. We will have to be mindful and watchful how the price movement is. I will keep monitoring item by item to rein in prices for anything that goes haywire. This pointed attack on inflation will need to continue,” she said.
The June inflation number surprised analysts on the downside. A Bloomberg forecast of economists projected June CPI to be 7.1%. The moderation in inflation was driven by a broad based easing of prices. While food inflation has come down from 7.97% in May 2022 to 7.75% in June 2022, core inflation — this measures the inflation for non-food non-fuel items in the CPI basket — fell from 6.2% in May 2022 to 6% in June 2022.
To be sure, June is the sixth consecutive month when inflation has ended up above the 6% mark, which is the upper limit of RBI’s tolerance band under India’s inflation targeting framework. Going by RBI’s June MPC resolution, CPI will continue to stay above the 6% mark in the September (7.4%) and December (6.2%) quarters as well before it comes down to 5.8% in the quarter ending March 2023.
Economists, however, believe that RBI will effect yet another rate hike in its August MPC meeting.
“CPI inflation was steady at 7.0% in June, as favourable base effects offset sequential price rises. We maintain that CPI will stay above 6% until October. We expect RBI to deliver a 35 basis points repo rate hike in its August MPC,” Rahul Bajoria, MD & Chief India Economist, Barclays said in a note.
In its unscheduled meeting in May and the June meeting, RBI has already increased the policy rate by 0.9 percentage points.
Some of the easing in inflation was also on account of moderation in global commodity prices on account of recession fears in advanced economies. “As commodity prices have come off from their recent peaks lately, it will have some cooling impact on inflation, but the weakness in rupee may wipe out some these gains,” Sunil Kumar Sinha, Principal Economist, India Ratings and Research said in a note. The Indian rupee touched yet another low of 79.53 against a dollar on July 12.
While the inflation numbers were not as bad as what RBI expected them to be, IIP numbers for the month of May underlined the problem of K-shaped recovery in the Indian economy. While annual growth for May IIP jumped to 19.6% from its April 2022 reading of 6.7%, the actual rebound compared to pre-pandemic value of May 2019 was just 1.7%, significantly lower than the 6.4% growth in April 2022 over April 2019 numbers. When read with the fact that PMI Manufacturing has actually been losing momentum — it fell to 54.6 and 53.9 in May and June compared to 54.7 in April — it seems that manufacturing activity could lose further momentum going forward. A PMI value above 50 indicates expansion in economic activity compared to the previous month.
Still, the fact that the IIP growth marks an increase over pre-pandemic levels is cause for some cheer — at least in the short term.
“The improvement in industrial growth has been supported by resilient demand, with the index now 1.7% above its pre-pandemic levels in May 2019. So far, robust growth in exports, along with greater mining and fertilizer production are helping to boost output, while manufacturing also faced easier supply headwinds. Still, we see scope for moderation going forward, as a combination of tempered demand and rising costs are likely to dampen activity levels,” Bajoria said in a note.
